China Mengniu Dairy

Yashili deal fuels rally in Mengniu

Dairy firm jumps 6.9 per cent after offer of HK$12.5 billion for infant formula maker

PUBLISHED : Thursday, 20 June, 2013, 12:00am
UPDATED : Thursday, 20 June, 2013, 3:53am

China Mengniu Dairy soared to the highest level in more than five years after the country's largest dairy producer offered HK$12.5 billion to buy a mainland maker of infant formula.

The stock rose 8.8 per cent intraday to HK$29.20 and closed at HK$28.70, up 6.9 per cent. Yashili International, the acquisition target, gained 3 per cent, while the benchmark Hang Seng Index fell 1.1 per cent. Shares in the two companies resumed trading after being halted since June 13.

Mengniu agreed to buy 75 per cent of Yashili from chairman Zhang Lidian's family and Carlyle, it said on Tuesday. It will also offer to buy the rest of the firm for HK$3.50 a share in cash, or about 5 per cent more than Yashili's closing price on June 13.

Yashili should lift Mengniu's earnings per share next year by 7 to 17 per cent as it would help "rapid expansion into the fast-growing milk powder segment", Credit Suisse analyst Kevin Yin said in a note to clients.

The investment would help Mengniu build a bigger presence in the mainland's baby formula market, which was projected to expand more than 70 per cent to 133.5 billion yuan (HK$169 billion) by 2015, Euromonitor International said.

The Hohhot, Inner Mongolia-based company is making its third deal in two months after food scandals including contaminated milk powder and rat meat sold as mutton fuelled demand for safer products and pushed the government to tighten regulations.

"The government is trying to consolidate the industry by backing Mengniu to take control of smaller ones so it can better monitor both upstream and downstream food quality," said Todd Yang, an analyst at Guosen Securities.

Beijing would push to ensure the safety of baby milk products and draft policies to support deals among producers, the State Council said this month. Cofco, the state-backed agricultural and food industry supplier, owns 19 per cent of Mengniu.

Yashili sourced all its milk from New Zealand and was building a plant there, its annual report said.

The company said it had 1,500 regional distributors across China for its milk powder.

Mengniu listed Yashili's "high brand recognition, imported premium dairy raw materials and a proprietary formula" among reasons for the acquisition.